B.C. – no breach of natural justice where arbitrator invites submissions on new issue but declines to incorporate them in award – #508

In Hotel Georgia Development Ltd. v The Owners, Strata Plan EPS849, 2021 BCSC 1236, Madam Justice Heather MacNaughton held that the arbitrator committed no breach of natural justice by inviting submissions on a new issue which he introduced but then declined to rely on out of fairness to Respondent. “Where an arbitrator considers an approach to an issue that has not been raised by either party, natural justice requires the arbitrator to give the parties an opportunity to comment on the approach. The fact that a party does not make sufficient use, if any, of the opportunity given by the arbitrator is not a breach of natural justice and, accordingly, not a basis for setting aside an arbitral award”.  MacNaughton J. observed that the arbitrator had signalled a gap in Claimant’s evidence and sought submissions on his ability to make a quantum meruit award. Despite having invited submissions and effectively granted Claimant an opportunity to compensate for its evidentiary gap, the arbitrator elected not to reproduce the responding submissions in the award.  “It would be clearly unfair and prejudicial to the Respondent to have a new legal basis for recovery of common law damages at this stage and I exercise my discretion against pursuing that analysis”.

Hotel Georgia Development Ltd. (“HGD”) and The Owners, Strata Plan EPS849 (the “Residential Strata”) disputed interpretation of reciprocal easement agreement (“REA”) involving three (3) parcels of land and a forty-eight (48) story luxury mixed-use tower comprising hotel, commercial and residential units (“Development”).

In particular, HGD and Residential Strata disputed cost sharing rights and obligations attaching to shared areas, common services and facilities as well as equipment and installation.  See paras 12-16 for more details regarding the Development, paras 17-22 for the REA and paras 23-27 regarding the dispute.

Despite efforts to resolve disagreements and notwithstanding the retention of expert accounting services, the dispute remained and the parties engaged in arbitration to resolve their competing interpretations of the REA’s cost sharing provisions. HGD initiated the arbitration on March 22, 2019, framing its claim as a debt claim or, in the alternative, arguing that Residential Strata had been unjustly enriched.  Residential Strata disputed HGD’s claims and filed a counterclaim. Residential Strata submitted that HGD had (a) misinterpreted the REA’s provisions on shared costs, (b) improperly charged and collected amounts under that misinterpretation and (c) provided inadequate accounting records to establish a debt owing under the REA.

As HGD had not yet issued the 2019 cost sharing reconciliation, the arbitration focused on cost sharing for 2017 and 2018.  An interim award had issued (“Interim Award”) ordering Residential Strata to pay the $1,275,799.37 amount in dispute pending arbitration with a per diem interest  Residential Strata did pay the amounts stipulated in the Interim Award but did so under protest.

Following the hearing but before issuing an award, the arbitrator sought submissions from the parties on quantum meruit, an issue which he introduced. 

[34] On April 21, 2020, after the conclusion of the hearing, the Arbitrator wrote to counsel asking what options were available to him if he found that HGD had provided inadequate accounting records, or failed to prove individual Shared Costs, and whether he was permitted to assess damages on a quantum meruit basis. He invited additional submissions.

[35] On April 30, 2020, the Residential Strata delivered its supplemental submissions. It argued that the Arbitrator could not assess damages. If HGD had not provided adequate accounting records, or not proved individual Shared Costs, then its claim should be dismissed.

[36] On May 1, 2020, HGD delivered its supplemental submissions. HGD argued that, if the Arbitrator found that the respondent was required to pay its proportionate share of Shared Costs, but that the evidence in support of an individual item of Shared Costs was inadequate to establish the precise amount owed, the Arbitrator must assess damages for breach of contract and could not simply dismiss the claim”.

The arbitration resulted in a May 22, 2020 award (“Partial Final Award”) which, among other dispositive orders, granted twenty-three (23) percent of HGD’s claims and disallowed the balance.  The Partial Final Award also dismissed HGD’s claims for damages, noting that HGD was not entitled to have damages assessed for those items for which Residential Strata was liable but for which HGD had not proven the exact amount claimed.  MacNaughton J. at paras 39-58 summarized the Partial Final Award.

HGD applied for (i) leave to appeal the Partial Final Award or, in the alternative, (ii) to set aside the Partial Final Award on the basis of arbitral error due to an alleged failure to observe the rules of natural justice. Given the applicable transition provisions and the date on which HGB and Residential Strata engaged in arbitration, HGB applied under section 30 of the former Arbitration Act, RSBC 1996, c 55 (now repealed, replaced as of September 1, 2020 with the Arbitration Act, SBC 2020, c 2).

(i) arbitral error and natural justice (paras 60-75) –  Section 30 of the former Arbitration Act provides the court discretion to set aside an award where the arbitrator has committed an arbitral error which section 1(d) defines as including “failure to observe the rules of natural justice”.

HGD argued that the arbitrator was “silent” with regard to HGD’s submissions on quantum meruit and therefore constituted an arbitral error under section 30 of the Arbitration Act.  MacNaughton J. disagreed.

With reference to Mungo v. Saverino, [1995] O.J. No. 3021 paras 72-73, MacNaughton J. pointed out that her involvement in an application to set aside was limited to dealing with “procedural matters, not the legal correctness of the decision” and that reviewing courts owed “a high degree of deference”.  MacNaughton J. referred also to Arbutus Software Inc. v. ACL Services Ltd., 2012 BCSC 1834 paras 81-82 for its overview of the requirements of natural justice.  “Natural justice requires an arbitrator to act with procedural fairness and may require processes tailored to meet a particular case”.  MacNaughton J. noted that, as the party alleging a breach of natural justice, HGD bore the burden of proving it.

[68] Where an arbitrator considers an approach to an issue that has not been raised by either party, natural justice requires the arbitrator to give the parties an opportunity to comment on the approach. The fact that a party does not make sufficient use, if any, of the opportunity given by the arbitrator is not a breach of natural justice and, accordingly, not a basis for setting aside an arbitral award.

[69] In this case, the Arbitrator sought submissions on the issue of his ability to make a quantum meruit award.

[70] An arbitrator is required to give comprehensible reasons, but such reasons need not recite every submission and outline why every submission was accepted or rejected”.

MacNaughton J. recorded that the issue of HGD’s inadequate proof had been raised during the arbitration and HGD did not respond to it.

[73] Nevertheless, before releasing the Partial Final Award, the Arbitrator sought written submissions on the issue from counsel. As he was considering an approach not advocated by the parties, natural justice required him to give the parties an opportunity to comment on such an approach. He did so, and both counsel made submissions. HGD proposed that the arbitrator assess common law damages in place of the debt claimed, while the Residential Strata maintained that approach would be prejudicial to it and the claim should be dismissed”.

MacNaughton J. acknowledged that the arbitrator did not mention HGD’s position in the Partial Final Award when dealing with the issue of inadequate proof but had instead declined to address the issue due to fairness and prejudice.  “It would be clearly unfair and prejudicial to the Respondent to have a new legal basis for recovery of common law damages at this stage and I exercise my discretion against pursuing that analysis”.

The arbitrator had therefor not retained the parties’ submissions on the issue of quantum meruit which he had raised. Without those submissions on the issue he raised, and due to the fairness and prejudice to Residential Strata as respondent to HGD’s claims in the arbitration, the arbitrator found no basis to grant HGD an order of damages and relied on the absence of HGD’s evidence to dismiss the corresponding claim.

(ii) leave to appeal (paras 76-95) – MacNaughton J. set out the applicable test for granting leave and, having done so, proceeded at paras 96-146 to analyse the questions raised.  MacNaughton J.’s analysis lead her to conclude that HGD raised mixed questions of fact and law rather than questions of law and she dismissed the application for leave to appeal.

MacNaughton J. reviewed the applicable legislative provisions, including HGD’s reliance on section 31(2)(a), and key case law articulating the approach to take when granting leave to appeal on a question of law.  She considered Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 SCR 688 paras 43-47 and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53 (CanLII), [2014] 2 SCR 633 paras 38-40 as well as their application in MSI Methylation Sciences, Inc. v. Quark Venture Inc., 2019 BCCA 448. (For the earlier Arbitration Matters note on the latter B.C. Court of Appeal decision, see “B.C. – Court of Appeal provides summary of principles applicable in appeals of arbitration awards – #248” and the urbitral notes below).

HGD raised Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 as having reset the standard applicable to MacNaughton J.’s review of the Partial Final Award.  HGD argued that the appeal would now be subject to a standard of correctness review pursuant to Housen v. Nikolaisen, 2002 SCC 33 (CanLII), [2002] 2 SCR 235.  MacNaughton J. noted HGD’s argument but declined to engage with it in light of her determination that HGD had failed to establish a question of law.

MacNaughton J.’s review lead her to observe that extricable questions of law are “rare”.  She added that “reviewing courts should be wary of parties trying to frame a question of mixed fact and law as a question of law for the purposes of reaching the high threshold for leave to appeal”.

[95] I agree with the Residential Strata’s position that the cases establish a process to ensure that the threshold question in the AA—identifying a question of law—is met first. To dive into the merits of an arbitrator’s contractual analysis, and consider whether the standard of review is reasonableness or correctness, is to “put the cart before the horse”. The analysis must first be characterized as raising a legal question for review: Allard v. The University of British Columbia, 2021 BCSC 60 at para. 39, citing Teal Cedar at para. 60. To the extent that a review of the evidence is required to make the argument that an error of law occurred, the error cannot be said to be on the face of the award”.

urbitral notes – First, for more on the decision in first instance in the referred to by MacNaughton J., see the earlier Arbitration Matters note “B.C. – no arbitral error where arbitrator seeks assistance on legal principles raised in, but beyond, parties’ authorities – #183” regarding MSI Methylation Sciences, Inc. v. Quark Ventures Inc., 2019 BCSC 440. Madam Justice Elaine J. Adair dismissed claims that the arbitrator had committed arbitral error due to breach of natural justice by allegedly (i) deciding the dispute on authorities not submitted by either party and (ii) adopting his own theory of damages not advanced by either party.  Adair J. held that the legal principles were not obscure legal points raised for the first time, created by the arbitrator or divorced from the cases and argument submitted by the parties.  Adair J. also held that the arbitrator did not commit arbitral error by not referring to each of a party’s submissions or seeking assistance beyond authorities submitted.

Second, see the earlier Arbitration Matters note “Ontario – on appeal, court raises legislation neither party pleaded in arbitration, reversing arbitrator’s definition of key term – #502” regarding Her Majesty the Queen in Right of Ontario (Minister of Government and Consumer Services) v. Royal & Sun Alliance Insurance Company of Canada, 2021 ONSC 3922. Mr. Justice Frederick L. Myers raised the application of the Legislation Act, 2006, SO 2006, c 21, Sch F which neither party had argued in the arbitration and, having invited and heard argument, held that it governed and served to reverse the interpretation of a key term in the arbitration. Myers J. also noted that he followed Ontario precedent that Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65 applied to appeals in statutory arbitrations but he limited the scope of that precedent, adding that it “cannot to be taken as standing for a broader proposition that Vavilov applies generally to all appeals from commercial arbitrations in Ontario”.

Third, MacNaughton J. referred to the following two (2) paras from Arbutus Software Inc. v. ACL Services Ltd., 2012 BCSC 1834 which provide a short list of “recognized” breaches of natural justice.  The original decision includes references to source cases.

[81] Natural justice requires an arbitrator to act with procedural fairness.  The concept of natural justice can mean different things in different cases, however, and the standard will vary to suit the circumstances.  For example, natural justice may be denied where the arbitrator fails to give a party the opportunity to present its case, refuses to admit relevant evidence, or fails to deal with all issues for determination.  In addition, depending upon the circumstances, a failure to order production of necessary documents may amount to a breach of the rules of natural justice: Williston Navigation Inc. v. BCR. Finav No. 3 et. al. (2007), 2007 BCSC 190 (CanLII), 69 B.C.L.R. (4th) 187; Amos Investments Ltd. v. Minou Enterprises Ltd., 2008 BCSC 332.

[82] In Westnav Container Services Ltd. v. Freeport Properties Ltd., 2009 BCSC 184, rev’d [Westnav Container Services Ltd. v. Freeport Properties Ltd.,] 2010 BCCA 33, leave to appeal ref’d, [2010] S.C.C.A. No. 95, Silverman J. summarised the sorts of breaches of natural justice that have been recognised in the commercial arbitration context.  He stated:

[63] Recognised breaches of natural justice in commercial arbitration include:

a) failure of the tribunal to comply with a general duty of fairness;

b) failure by a party to give proper notice of the arbitration or of the appointment of an arbitrator;

c) manifestly unfair or unequal treatment of a party by the arbitrator;

d) failure by the arbitrator to give a party the opportunity to present its case or to respond to the other party’s case;

e) viewing or taking of evidence by the arbitrator outside of the knowledge of the parties;

f) failure by the arbitrator to admit relevant evidence;

g) failure to deal with all the issues before the tribunal; and

h) uncertainty or ambiguity as to the effect of the Award”.

The list concludes with the following case references: Amos Investments Ltd. v. Minou Enterprises Ltd., 2008 BCSC 332, 45 B.L.R. (4th) 258; Université du Québec à Trois-Rivières v. Larocque, 1993 CanLII 162 (SCC), [1993] 1 S.C.R. 471, 11 Admin. L.R. (2d) 21; Zaleschuk Pubs Ltd. v. Barop Construction Ltd. (1992), 1992 CanLII 564 (BC SC), 68 B.C.L.R. (2d) 340 paras 35-37; Nortel Networks Inc. v. Calgary (City), 2008 ABCA 370, 97 Alta. L.R. (4th) 1 paras 19-20; and, New Brunswick Nurses Union v. New Brunswick (Board of Management), 1999 CanLII 3835 (N.B.Q.B.).

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